Owen: Impressive resilience
Four in five SME law firms have committed specific funds to AI-based solutions, according to new research that showed them focusing more on increasing profitability than turnover.
The annual law firm survey by accountants Crowe in association with the Institute of Legal Finance & Management showed a sector that continued to perform strongly despite an uncertain economic environment.
Revenue growth remained robust – at 11-12% – across both City and regional firms, with many reporting results ahead of budget.
“Encouragingly, half of all firms exceeded their original financial expectations for the year, underlining the resilience and adaptability that continues to characterise the profession.”
Crowe, which spoke to 39 firms with turnovers of between £1.7m to £69m, said: “Many firms continue to benefit from strong pricing discipline, healthy activity levels and continued investment in key practice areas. These factors have helped to support topline growth during the year.
“The consistency of growth rates is particularly noteworthy given the differing markets in which City and regional firms operate. It suggests that firms have generally adapted well to changing client demands and market conditions.”
Attention was shifting away from revenue growth and towards profitability, cash generation and operational efficiency – 51% identified profitability and margin improvement as a key strategic priority.
Profit pools grow by 12% in the City and 6% in the regions but profit per partner was under pressure outside of the capital.
“Headline profit growth does not always translate into improved returns for individual partners. Many firms continue to expand partner numbers and invest in senior talent, diluting the impact of profit growth on profit per partner.
“Regional firms appear to be facing greater pressure in this respect. Whilst profits are increasing, profit per partner growth is proving more difficult to achieve.”
Crowe said that, whilst firms continued to grow, rising people costs remained the most significant pressure on margins, and more than half of firms identified profitability improvement as a key strategic priority.
“Notably, 88% of firms are considering pay rises of no more than 5%, highlighting the balancing act firms face between rewarding talent and protecting partner returns.”
Some 79% of firms have committed specific funds to AI-based solutions. “This represents a significant shift in approach,” said Crowe.
“For many firms, the question is no longer whether they should invest in AI, but how best to implement it. Firms are increasingly exploring opportunities to improve efficiency, enhance service delivery and support knowledge management through technology….
“While the pace of adoption varies, there is little doubt that AI has become a strategic priority across much of the profession.”
City firms saw lock-up rise sharply from 135 to 153 days, while regional firms improved from 140 to 132 days. “The findings suggest that many regional firms have successfully focused on billing discipline, collections and working capital management.
“Given the current economic environment, firms that can improve cash conversion without impacting client service are likely to enjoy a significant competitive advantage.”
Nicky Owen, head of professional practices at Crowe, said: “The sector continues to demonstrate impressive resilience, with strong revenue growth across both City and regional firms despite ongoing economic uncertainty. However, this year’s findings show that growth alone is no longer the key differentiator.
“The firms pulling ahead are not necessarily those growing fastest. They are the firms turning growth into profit, cash and sustainable partner returns while continuing to invest in their people, technology and long-term future.
“What’s particularly interesting is the performance of regional firms, which delivered comparable growth and meaningful improvements in lock-up, demonstrating that strong financial performance is not confined to the largest firms.”